Macroeconomics

Despite good U.S. economic conditions, analysts are alarmed. Why?

Economists are looking forward in time for signals that point out to the next US economic turn, either down or up. Most of the ongoing concerns about the US Economy respect to the perils of unexpected macroeconomic shocks. And, what complicates the outlook is the word “unexpected”. Analysts can either forecast a manufactured crisis or see healthy economic growth. The difficulties stem from the lack of instruments for forecasting macroeconomic shocks. In other words, the problem derives from our natural inability to look into the future. And, that is just okay. The great news is that old fashion methods of analysis outperform any sophisticated econometric technique, particularly in these instances. What is that old fashion method of analysis? Written English.

The current economic situation alarms most of the analysts since, aside oil-related industry, everything else seems to be working just as it should. As of March 2016, the pace of employment levels is satisfactory for many (4.9 percent), household debt looks healthy, inflation is “sort of” on target (1.4 percent), financial sector appears tranquil, and the US economy seems resilient to unexpected international upheavals.

Economic Sectors:

In fact, looking at the Beige Book Report (March 2, 2016) by sectors, it is possible to read that consumer spending increased in almost every district, with Kansas City being the exception. Also, the economic industry related to tourism reported good activity thanks to mild winter weather as well as to low gas prices. Auto sales continued to report elevated levels all over the country. The demand for staffing services increased as a signal of the strength of labor markets. Both residential and non-residential real estate sales and construction expanded at an acceptable pace. And, the finance sector reported slight increases in loans demand as well as stable credit environment.

Otherwise, agricultural sector reported flat to down conditions as an effect of mostly low commodity prices and weak global demand. Contacts that participate in the surveys suggested that low levels of exports are limiting gains, which is congruent with the appreciation of the U.S. Dollar. Also, as it has become usual, most districts noted that the energy sector is spilling over many industries.

Geographic Regions:

Regionally speaking, the tenth district –Kansas City- is the only one reporting some sort of economic contraction. Every other area from Richmond to Minneapolis are reporting flat to modest economic conditions. San Francisco, Cleveland, Atlanta, and Chicago altogether reported moderate growth. St. Louis, Dallas and New York reported flat circumstances.

The fear rises from the fact that thus far economists do not distinguish between a financial distress akin situation and a crisis triggered by uncertainty. Given that they both usually happen at the same time, the empirical evidence makes them difficult to disentangle. There is where the “word of mouth” comes in handy for economic analysis.

Understanding whatever the future holds for the economy requires defining measurably the very elusive concept of uncertainty. When main economic indicators perform acceptably, the focus of analysts turns onto uncertainty. Although everything looks good, analysts still have some reasons to worry, especially, about the fact that economic expansions last on average no more than 58.4 months. From there, uncertainty starts to drive the logic of positive analysis, especially when everyone believes that the current expansion will not outlast the longest one, ten years (1991-2001).

Now, reading lengthy reports about the economy or mapping economic news will also have limited insights. Nonetheless, those sources comprise most of the information analysts need to outlook the future. The problem is that the latest version of the Beige Book reveals mostly good things about the state of the economy, which leaves everybody at the beginning of this story.

 

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